Sales & Operations Planning

Sales & Operations Planning

Dr. Ashutosh SarkarAssistant Professor

Vinod Gupta School of ManagementIndian Institute of Technology Kharagpur

Master Production Schedule (Mix)

Strategic Planning

Marketing Plan

Resource Planning

Financial Planning

Demand Management

Sales Plan Operations Plan

Sales & Operations Planning(Volume)

Rough-cut Capacity Planning

• SOP links manufacturing to strategic objectives

• Four fundamentals: demand, supply, volume and mix

• Balance between demand and supply

• Volume concerns big-picture decisions– How much to make– Production rates for product families

• Mix concerns detailed decisions– Which individual products to make– In what sequence– For which customer

Materials Planning & ControlHistory Plan

Oct Nov Dec Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec

SalesForecast (in 1,000 units)ActualDifferenceOperationsPlanActualDifferenceInventoryPlanActual

333 437 230

300 400 200-33 -37 -30

333 437 230360 455 300 27 18 70

100 100 100 60 115 215

253 280 340 300 393 233 287 420 480 427 527 393

348 366 401 348 383 383 174 401 348 383 348 348

310 396 457 506 496 646 534 514 383 339 161 116

Sample Sales & Operations Plan

8-5

Aggregate Planning

• SOP or Aggregate plan is thus a statement of – levels of capacity– Levels of production– Levels of subcontracting– Levels of inventory, stockouts, and pricing over a specified

time horizon– Goal is to maximize profit– decisions made at a product family (not SKU) level– time frame of 3 to 18 months– how can a firm best use the facilities it has?

8-6

Aggregate Planning

• Specify operational parameters over the time horizon:– production rate– workforce– overtime– machine capacity level– subcontracting– backlog– inventory on hand

8-7

The Aggregate Planning Problem

• Given the demand forecast for each period in the planning horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firm’s (supply chain’s) profit over the planning horizon

8-8

Information Needed foran Aggregate Plan

• Demand forecast in each period• Production costs

– labor costs, regular time (mu/hr) and overtime (mu/hr)– subcontracting costs (mu/hr or mu/unit)– cost of changing capacity: hiring or layoff (mu/worker) and cost of

adding or reducing machine capacity (mu/machine)• Labor/machine hours required per unit• Inventory holding cost (mu/unit/period)• Stockout or backlog cost (mu/unit/period)• Constraints: limits on overtime, layoffs, capital available, stockouts

and backlogs

8-9

Outputs of Aggregate Plan• Production quantity from regular time, overtime, and subcontracted time:

used to determine number of workers and supplier purchase levels

• Inventory held: used to determine how much warehouse space and working capital is needed

• Backlog/stockout quantity: used to determine what customer service levels will be

• Machine capacity increase/decrease: used to determine if new production equipment needs to be purchased

• A poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity

8-10

Aggregate Planning Strategies

• Trade-off between capacity, inventory, backlog/lost sales

• Chase strategy – using capacity as the lever

• Time flexibility from workforce or capacity strategy – using utilization as the lever

• Level strategy – using inventory as the lever

• Mixed strategy – a combination of one or more of the first three strategies

8-11

Chase Strategy• Production rate is synchronized with demand by varying machine capacity

or hiring and laying off workers as the demand rate varies

• However, in practice, it is often difficult to vary capacity and workforce on short notice

• Expensive if cost of varying capacity is high

• Negative effect on workforce morale

• Results in low levels of inventory

• Should be used when inventory holding costs are high and costs of changing capacity are low

8-12

Time Flexibility Strategy• Can be used if there is excess machine capacity

• Workforce is kept stable, but the number of hours worked is varied over time to synchronize production and demand

• Can use overtime or a flexible work schedule

• Requires flexible workforce, but avoids morale problems of the chase strategy

• Low levels of inventory, lower utilization

• Should be used when inventory holding costs are high and capacity is relatively inexpensive

8-13

Level Strategy• Maintain stable machine capacity and workforce levels with a constant

output rate

• Shortages and surpluses result in fluctuations in inventory levels over time

• Inventories that are built up in anticipation of future demand or backlogs are carried over from high to low demand periods

• Better for worker morale

• Large inventories and backlogs may accumulate

• Should be used when inventory holding and backlog costs are relatively low

8-14

Aggregate Planning at Red Tomato Tools

Month Demand ForecastJanuary 1,600February 3,000

March 3,200April 3,800May 2,200June 2,200

8-15

Fundamental Tradeoffs in Aggregate Planning

• Capacity (regular time, overtime, subcontract)

• Inventory

• Backlog / lost sales

Basic Strategies

• Chase strategy

• Time flexibility from workforce or capacity

• Level strategy

8-16

Aggregate Planning

Item CostMaterials $10/unitInventory holding cost $2/unit/monthMarginal cost of a stockout $5/unit/monthHiring and training costs $300/workerLayoff cost $500/workerLabor hours required 4/unitRegular time cost $4/hourOver time cost $6/hourCost of subcontracting $30/unit

8-17

Aggregate Planning (Define Decision Variables)

Wt = Workforce size for month t, t = 1, ..., 6

Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6

Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6

Pt = Production in month t, t = 1, ..., 6

It = Inventory at the end of month t, t = 1, ..., 6

St = Number of units stocked out at the end of month t, t = 1, ..., 6

Ct = Number of units subcontracted for month t, t = 1, ..., 6

Ot = Number of overtime hours worked in month t, t = 1, ..., 6

8-18

Aggregate Planning(Define Objective Function)

6

1

6

1

6

1

6

1

6

1

6

1

6

1

6

1

30105

26500

300640

tt

tt

tt

tt

tt

tt

tt

tt

CPS

IOL

HWMin

8-19

Aggregate Planning (Define Constraints Linking Variables)

• Workforce size for each month is based on hiring and layoffs

.80,6,...,1

0

,

0

1

1

WwheretforLHWW

orLHWW

tttt

tttt

8-20

Aggregate Planning (Constraints)

• Production for each month cannot exceed capacity

.6,...,1

,0440

,440

tforPOW

OWP

ttt

ttt

8-21


• Inventory balance for each month

.500,0

,000,1,6,...,1

,0

,

60

0

11

11

IandS

IwheretforSISDCPI

SISDCPI

ttttttt

ttttttt

8-22


• Over time for each month

.6,...,1

,010

,10

tforOW

WO

tt

tt

8-23

Scenarios

• Increase in holding cost (from $2 to $6)• Overtime cost drops to $4.1 per hour• Increased demand fluctuation

8-24

Increased Demand Fluctuation

Month Demand ForecastJanuary 1,000February 3,000

March 3,800April 4,800May 2,000June 1,400

8-25

Aggregate Planning in Practice

• Think beyond the enterprise to the entire supply chain

• Make plans flexible because forecasts are always wrong

• Rerun the aggregate plan as new information emerges

• Use aggregate planning as capacity utilization increases

Week Number

1 2 3 4 5 6 7 8 9 10 11 12

ForecastAvailableMPSOn hand

5 5 5 5 5 5 15 15 15 15 15 1525 30 35 40 45 50 45 40 35 30 25 2010 10 10 10 10 10 10 10 10 10 10 1020

Materials Planning & Control

Sample Master Production Schedule: Level Strategy

Week Number

1 2 3 4 5 6 7 8 9 10 11 12


5 5 5 5 5 5 15 15 15 15 15 1520 20 20 20 20 20 20 20 20 20 20 205 5 5 5 5 5 15 15 15 15 15 1520


Sample Master Production Schedule: Chase Strategy


Week Number

1 2 3 4 5 6 7 8 9 10 11 12


5 5 5 5 5 5 15 15 15 15 15 1515 10 5 30 25 20 5 20 5 20 5 20 30 30 30 3020

Sample Master Production Schedule: Lot Sizing


Week Number

2 3 4 5 6 7 8 9 10 11 12 13


10 10 10 10 10 10 15 15 15 15 15 150 -10 10 0 -10 -25 -10 -25 -10 -25 -10 -25 30 30 30 30 10

Rolling Through Time


Week Number

2 3 4 5 6 7 8 9 10 11 12 13


10 10 10 10 10 10 15 15 15 15 15 1530 20 10 30 20 5 20 5 20 5 20 530 30 30 30 30 10

Rolling Through Time


Week Number

1 2 3 4 5 6 7 8 9 10 11 12

ForecastOrdersAvailableATPMPSOn hand

5 5 5 5 5 5 15 15 15 15 15 155 3 215 10 5 30 25 20 5 20 5 20 5 2010 30 30 30 30 30 30 30 3020

Order Promising with a Master Production Schedule

Available to promise = MPS – all orders of that period and subsequent periods until the next MPS


• Material Requirement Planning (MRP) is the detailed plans for part needs

• For batch manufacturing processes MRP is central to the development of detailed material requirements plan

• MRP is characterized with time-phased requirement records

• MPS is the input to the development of the MRP


Period

1 2 3 4 5 6 7 8 9 10

Gross Requirement 10 40 10

Scheduled Receipts 50

Projected Available Balance

54 44 44 4 44

Planned Order Releases

50

Lead time = one periodLot size = 50

4

Sample Material Requirement Plan

Product Structure Diagram1605

Shovel Complete

13122 31414127(4 required)

062(4 required)

118048

11495457 082(2 required)

14127(6 required)

0192142

1118129

Detailed information on the configuration of the product for the manufacture of Shovel

Bill of Materials1605 Snow Shovel

13122 Top Handle Assembly (1 required)457 Top Handle (1 required)

082 Nail (2 required)11495 Bracket Assembly (1 required)

129 Top Handle Bracket (1 required)1118 Top Handle Coupling (1 required)

048 Scoop-shaft Connector (1 required)118 Shaft (1 required)062 Nail (1 required)14127 Rivet (4 required)314 Scoop Assembly

2142 Scoop (1 required)019 Blade (1 required)14127 Rivet (6 required)

Material Requirement Planning

13122 Top Handle Assembly Lead Time = 2

Week

1 2 3 4 5 6 7 8 9 10

Gross requirements

20 10 20 5 35 10

Scheduled Receipts

Projected available balance

25 5 5 0 0 0 0 0 0 0

Planned order releases

5 20 5 35 10

25


457 Top Handle Lead Time = 2

Week

1 2 3 4 5 6 7 8 9 10

Gross requirements

5 20 5 35 10

Scheduled Receipts

25


22 17 42 22 17 17 0 0 0 0


18 10

22


082Nail(2 required) Lead Time = 1Lot size=50

Week

1 2 3 4 5 6 7 8 9 10

Gross requirements

10 40 10 70 20

Scheduled Receipts

50


54 44 44 4 44 44 24 4 4 4


50 50

4


11495Bracket Assembly Lead Time = 2

Week

1 2 3 4 5 6 7 8 9 10

Gross requirements

5 20 5 35 10

Scheduled Receipts


27 22 22 2 0 0 0 0 0 0


3 35 10

27


129 Top Handle BracketLead Time = 1

Week

1 2 3 4 5 6 7 8 9 10

Gross requirements

3 35 10

Scheduled Receipts


15 15 12 12 0 0 0 0 0 0


23 10

15


1118 Top Handle CouplingLead Time = 3Safety stock=20

Week

1 2 3 4 5 6 7 8 9 10

Gross requirements

3 35 10

Scheduled Receipts

15


39 54 51 51 20 20 20 20 20 20


4 10

39

Documents

Sales & Operations Planning